Netflix’s Chances After Rate Hike Remain Stronger Than Ever

All through the past decade, observers in industry and on Wall Street have had a handful of reasons to discount Netflix’s efforts. First, they claimed that Netflix could not beat Blockbuster’s entrenched retail presence. Wrong. Then they felt that Netflix could never attract people to its scant digital video offerings. Wrong again. Now they’re claiming that Netflix won’t survive its final transition to dominant digital video subscription provider, a transition that required raising the rent on DVD renters to fund digital content acquisition.

When will these people ever learn? We understand the psychology of cheering against a disruptive player like Netflix – it sure would be nice if we could just pretend all these digital disruptions will simply go away. But they won’t, and neither will Netflix (NSDQ: NFLX). Because the company:

» Serves consumers’ needs conveniently. No digital company is better than Netflix at making it easy to access its offerings. The interface is elegant; content is easy to discover and consume. In a world where consumers have much more complex options for viewing video content, Netflix stands out as a bright, shiny star in the dark expanse of relative inconvenience.

» Makes embedding Netflix very attractive to device makers. Partners like Samsung, LG Electronics (SEO: 066570), and Microsoft (NSDQ: MSFT) recognized as early as three years ago that the key to selling their devices and encouraging their regular use was to add Netflix. So attractive has this option been that Apple (NSDQ: AAPL) essentially conceded the failure of its iTunes video service to go mainstream by adding Netflix to the Apple TV last year, a very uncharacteristic move for the company and evidence that Netflix is a consumer proposition you must embrace

» Maintains a sticky, digital customer relationship. Netflix’s stickiness comes from its dependence on digital tools to acquire, satisfy, and retain customers. The company’s digital advantage in customer support has resulted in continuously declining costs of customer acquisition that a cable company would die for.

» Manages its economics by shifting to digital in every aspect of its business. Netflix continually looks for ways to shift costs from analog or manual processes to digital ones. This is true in the way the company manages its customer relationship, but it’s also true in the way it processes DVDs in fulfillment centers. Netflix’s dependence on digital throughout its entire business is one of the least-talked-about strategic advantages the company has built for itself.

That’s not to say that Netflix will walk a primrose path to ultimate victory. It has accumulated several enemies that want to see the company fail. And it depends on many new partners for critical pieces of its business success, including content producers, broadband ISPs, and the same device makers that relied on Netflix to sell their latest gadgets. All of these partners want to find a way to either restrict Netflix’s access to – or get more money for – the value they provide.

In the end, considering the factors that led to the company’s success as well as the threats looming over it, the next steps for Netflix are as obvious as they are crucial, including acquiring and producing more unique content, building a more diverse revenue base (adding VOD options that will allow it to widen the range of content it offers), and shifting the customer relationship from the household to the individual. The last bit is a crucial way to drive up revenue per household, but it’s also easier than you think – imagine separating the kids’ account from mom and dad’s content as a first step, all for $1.99 extra a month.

Yep, Netflix’s path from here is pretty straightforward. The only complicating issues on Netflix’s horizon that it can’t control are competitive responses from people like Amazon once it debuts its full-media color tablet or from Google/YouTube once it buys Hulu and uses it to provide better content on more platforms right away. So the game is far from over, but Netflix has a commanding lead that will require dramatic efforts to even catch up much less jump ahead.

People who watch content strategy should keep an eye on Netflix for these reasons. But people who take an even bigger view, one that focuses on product strategy for any industry (as do our clients, hence our new report that uses Netflix as a elegant excuse to explore the power of disruptive digital product strategy) can do much more than just prepare to compete with Netflix. They can learn to act like Netflix, in their own context and industry, reaping similarly outsized results.

James McQuivey is an analyst at Forrester Research, where he serves Consumer Product Strategy professionals. James blogs here.